National Conference on Public Employee Retirement Systems. The Secure Choice

Transcription

1 The Secure Choice Pension (SCP) National Conference on Public Employee Retirement Systems

2 Sponsor Basic Design National Conference on Public Employee Retirement Systems Additional Design Details Funding Return Distributions Backstop Secure Choice Pension (SCP) NCPERS/Hank Kim Public Private Board Multiple ER, DB (career accumulation plan) Most details decided by state law; state or regional coverage Contemplated at 3% ER and 3% EE Basic benefit guaranteed at 3%; Crediting at 5%; Retiree reserve fund provides for potential dividend above 7% Annuitized payments Determined by state law Plain Old Pension Plan (POPP) Pension Rights Center/ Judy Mazo (Segal Company, retired) ER DB (career average plan) Past service credits allowed; ER could offer separate 401(k); could be converted to traditional DB plan ER contributions based on EE s age and salary; EE contributions may be allowed Percentage (as low as 1%) of EE s career average pay multiplied by YOS; bonus benefits possible in any given year Annuitized payments, except benefits worth less than $5,000 Insured by PBGC, but lower premiums ($5 per participant) Adjustable Pension Plan (APP) Cheiron/Richard Hudson ER Hybrid Pension locked in at retirement? Greater of defined floor benefit set at 5% return or adjustable benefit (actual market return) Annuitized payments Benefits reduced Portfolio Cash Balance Plan Covington & Burling/ Robert Newman ER Cash balance plan EEs automatically enrolled; benefit expressed as account balance; managed professionally ER sole funder Principal guaranteed; higher cumulative rate possible Annuitized payments? Retirement Security Funds Pension Rights Center/ Karen Ferguson RSF is new licensed legal entity; ER, EE and retiree reps on advisory board Collective trust; pooled professional investment Financial institutions are eligible; Dutch model; expanded refundable saver s credit ER at 3% minimum; EE can match (2 to 1) reverse match concept; aggregate total contribution capped at 9% Annual crediting of 3% maximum; returns over 3% held in reserve fund Annuitized payments Benefits reduced Super Simple Plan Gene Steuerle/Pamela Perun ER DB (cash balance) Models are existing SIMPLE Plans and British NEST; larger saver s credit Minimum ER (contemplated at 4%) and EE contributions (2-3%); higher limits than 401(k)s; government match for low-income savers Market return Lump sum/rollover Market return 2

3 The Secure Choice Pension Public Private Partnership Board of Trustees Multiple Employer Plan spreading risk DB Career AccumulationPlan (Hybrid): each participant will have an individual account providing for a minimum guaranteed benefit and an opportunity for participation in additional earnings Flexibility, Predictability, Portability, Simplicity & Sustainability Conservative actuarial, funding, and investment assumptions Effectively use the investment power of public plans Augments (not replace) existing retirement programs Multiple options to address underfunding risk 3

4 Summary of Proposed Pension Provisions for the Secure Choice Pension (SCP) Normal Retirement at 65 6% Contribution Rate 7 % Long Term Investment Discount Rate Interest Crediting Rate is based on a US Treasury reported rate (approximately 5%) Social Personal 3% minimum career interest crediting rate Immediate vesting Individual SCP Participant Balances At retirement the SCP balance is converted to a guaranteed life annuity Security These provisions can be adjusted to fine-tune the balance between benefits and cost. Secure Choice Pension Savings including 401(k) s 4

5 SCP Estimated Income Replacement Entry Age Expected Social Security Replacement Ratio 1 ESTIMATED REPLACEMENT RATIOS WITH A 5% INTEREST CREDITING RATE Replacement Ratio from Expected Personal Savings Including 401(k) 2 Total Replacement Ratio with Social Security and Personal Savings Only Expected SCP Replacement Ratio 3 Total Replacement Ratio with SCP 25 30% 25% 55% 29% 84% 35 26% 18% 44% 21% 65% 45 17% 11% 28% 13% 41% 1 Calculated using 2011 Social Security bend points and assuming career earnings consistent with national average. For ages 35 and 45, thereplacement ratio is prorated to reflect the fraction of a participant s 35 years of covered earnings used in Social Security Primary Insurance Amount calculation which would be earned under their tenure with their current employer if they worked until age Calculated using assumed salary increases based on age, an average return of 5% per year, a contribution rate of 6% per year, retirement ofage 65, and annuity conversion based on PBGC annuity valuation assumptions. 3 Calculated using assumed salary increases based on age, and an expected credited interest rate of 5% per year. Retirement Income Replacement Gap: Surveys report individuals estimate 60% as adequate when 80% to 90% is needed. 5

6 3% 5% 7% SCP % minimum career interest crediting rate is the basis for the benefit 5% interest crediting rate is based on a US Treasury reported rate 7% is the long-term investment assumption used in the funding calculation Returns over 7% will be held in a reserve fund for payment of the crediting rate should plan experience be insufficient to meet the minimum credited interest rate Returns consistently in excess of 7% may be available to provide additional retiree benefits 6

7 SCP Funding: How It Works SCP funding takes a belt and suspenders approach for protection from adverse experience and flexibility in sharing the risk of underfunding. Four layers of protection are built in. Layer 1: Benefit Design as Shown Earlier Layer 2: The Annual Contribution Layer 3: The Dividend Reserve Fund (DRF) Layer 4: Termination or Withdrawal of An Employer LAYER 1 LAYER 2 LAYER 3 LAYER 4 7

8 SCP Sample Projections The following tables illustrate a sample projection of an employer group over a 10-year period The employer group assumes: 25 employees Ages uniformly distributed over the working career Average salary of $40,000 Modeled investment return and crediting rates are as shown in the tables 8

9 SCP Stress Test 1 The projection below models an investment market assuming the valuation assumptions as described earlier are exactly met. Effective Contribution % Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year % 6.03% 6.04% 6.04% 6.04% 6.03% 6.00% 5.99% 5.93% 5.89% 5.88% Funded % % % % % % % % % % % % Unfunded/ (Overfunded) Liability 0 (18,717) (39,644) (62,865) (88,463) (116,011) (146,953) (178,109) (216,429) (255,008) (286,433) DRF Investment Return 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% Total Payroll 1,000,000 1,035,181 1,071,091 1,107,363 1,144,006 1,181,031 1,210,979 1,240,228 1,247,629 1,268,236 1,290,993 9

10 SCP Stress Test 2 The projection below models an investment market using actual returns for the 1990 to 2000 period. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Effective Contribution % 6.01% 6.04% 5.98% 5.98% 5.96% 6.00% 5.67% 5.45% 4.97% 4.51% 4.32% Funded % % % % % % % % % % % % Unfunded/ (Overfunded) Liability 0 (17,047) (40,455) (66,519) (95,704) (124,574) (150,316) (174,103) (181,973) (212,750) (277,111) DRF ,062 32,012 76, , ,960 Investment Return % 19.36% 7.37% 8.20% 4.08% 22.31% 14.72% 19.97% 17.13% 13.58% Total Payroll 1,000,000 1,035,181 1,071,091 1,107,363 1,144,006 1,181,031 1,210,979 1,240,228 1,247,629 1,268,236 1,290,993 10

11 SCP Sample Projection 3 The projection below models an investment market using actual returns for the 2000 to 2010 period. Effective Contribution % Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year % 6.05% 6.12% 6.25% 6.14% 6.12% 6.14% 6.05% 6.06% 6.74% 6.47% Funded % % % % % % % % % % % % Unfunded/ (Overfunded) Liability 0 (16,603) (33,879) (47,404) (67,731) (90,861) (116,011) (147,462) (189,025) (169,664) (193,094) DRF Investment Return % -2.95% -8.39% 16.69% 7.73% 4.51% 10.17% 5.01% % 15.71% Total Payroll 1,000,000 1,035,181 1,071,091 1,107,363 1,144,006 1,181,031 1,210,979 1,240,228 1,247,629 1,268,236 1,290,993 11

12 States Massachusetts California New York Florida Ohio Connecticut Others 12

13 Small Businesses Favor or Oppose Now I am going to read you different components of a proposal to allow private sector workers to participate in a pension plan similar to the ones public employees get. Please listen to the whole thing, then I'll ask for your opinion about it. Under this proposal, people who work for private companies would have the opportunity to participate in a Secure Choice Pension, a new retirement plan modeled after the public employee pension system, and receive a guaranteed monthly pension benefit, like many public employees do, when they retire. Unlike a 401(k), employees would receive a guaranteed pension benefit of at least the amount they put in over time, plus any investment return. Employers could choose to simply give access to their employees, or contribute to the plan, or both. Instead of an individual account, the contributions would go into a large fund managed by a team of experienced investment professionals and overseen by an administrative board. The board would include representatives from the existing public employee pension system, representatives of participating employers, and representatives of participating employees. Contributions would be tax deferred meaning employees would pay no taxes on the money until they take it out. 13

14 Small business owners overwhelmingly support the Secure Choice Pension, regardless of whether or not they already provide a retirement benefit to their employees. The Secure Choice Plan Proposal All Small Business Benefits No Benefits Favor Oppose Don't Know Favor Oppose Favor Oppose Now, please tell me if you would favor or oppose this proposal having this type of retirement plan available for small private employers? [FAVOR/OPPOSE] Is that strongly or somewhat? 14

15 SCP Outreach Public pension stakeholders Plan sponsors, plans, unions/employee associations Defined benefit community ABC, EBRI, AARP Business and 401(k) industries Congress and the Administration The public 15

16 Campaign to bring awareness and support for SCPs We want ordinary Americans telling elected officials to make SCPs a reality We want employers and employees who don t have pensions to say they want SCPs We want folks who have pensions to say we support working Americans to have SCPs 16

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18 Thank You NCPERS 444 North Capitol Street, NW, Suite 630 Washington, DC